Desmond v. Taxi Affiliation Servs. LLC

• Citation: 344 F.Supp.3d 915
• Decision Date: 25 September 2018
• Docket Number: 17 C 8326
• Parties: Michael K. DESMOND, Not Individually, But as Chapter 7 Trustee for the Bankruptcy Estate of Yellow CAB Affiliation, Inc., Plaintiff, v. TAXI AFFILIATION SERVICES LLC ; Michael Levine; Patton R. Corrigan ; Evan Tessler; Gary Sakata; John Moberg; Yellow CAB Association Inc. a/k/a Yellow CAB Association Co.; Yellow Group LLC ; Yellow Medallion Holdings LLC; CL Medallion Holdings LLC; Taxi Medallion Management LLC; People Mover LLC; and Yellow CAB Partners LLC, Defendants.
• Court: U.S. District Court — Northern District of Illinois

344 F.Supp.3d 915

Michael K. DESMOND, Not Individually, But as Chapter 7 Trustee for the Bankruptcy Estate of Yellow CAB Affiliation, Inc., Plaintiff,

v.TAXI AFFILIATION SERVICES LLC ; Michael Levine; Patton R. Corrigan ; Evan Tessler; Gary Sakata; John Moberg; Yellow CAB Association Inc. a/k/a Yellow CAB Association Co.; Yellow Group LLC ; Yellow Medallion Holdings LLC; CL Medallion Holdings LLC; Taxi Medallion Management LLC; People Mover LLC; and Yellow CAB Partners LLC, Defendants.

17 C 8326

United States District Court, N.D. Illinois, Eastern Division.

Signed September 25, 2018

Edward Sidney Weil, Matthew T. Hays, John Francis Rhoades, Dykema Gossett PLLC, Chicago, IL, Hugh B. Sloan, Pro Hac Vice, Diamond McCarthy LLP, Dallas, TX, J. Gregory Taylor, Pro Hac Vice, Diamond McCarthy LLP, New York, NY, for Plaintiff.

Robert L. Dawidiuk, Shawn Michael Collins, Jeffrey Michael Cisowski, Jin Ah Hong, The Collins Law Firm, PC, Naperville, IL, for Defendants.

MEMORANDUM OPINION AND ORDER

John Z. Lee, United States District Judge

Plaintiff Michael K. Desmond ("the Trustee") is the Chapter 7 Trustee for the Bankruptcy Estate of Yellow Cab Affiliation, Inc. ("YCA"), a former Chicago taxicab affiliation. The Trustee has filed sixteen counts against the following Defendants: Taxi Affiliation Services LLC ("TAS"); Michael Levine; Patton R. Corrigan; Evan Tessler; Gary Sakata; John Moberg; Yellow Cab Association, Inc. ("New YCA"); Yellow Group LLC ("Yellow Group"); Yellow Medallion Holdings LLC ("YMH"); CL Medallion Holdings LLC ("CLMH"); Taxi Medallion Management LLC ("TMM"); People Mover, LLC ("People Mover"); and Yellow Cab Partners LLC ("Yellow Cab Partners"). In short, the Trustee claims that Defendants engaged in a scheme to render YCA insolvent, so that it could not pay its creditors, and then established a new company that appropriated YCA's valuable trade dress.

Defendants now move to dismiss the Trustee's claims under Federal Rule of Civil Procedure ("Rule") 12(b)(6). Defendants argue that the Trustee's claims fail to meet the heightened pleading standard of Rule 9(b), which requires that allegations of fraud be pleaded with particularity. Defendants also contend that the Trustee's claims are precluded by prior bankruptcy proceedings and barred by the applicable statutes of limitations. Defendants have also moved for sanctions pursuant to Rule 11. For the following reasons, Defendants' motion to dismiss [22] is granted in part and denied in part. The motion for sanctions [36] is denied.

Background ¹

YCA was a Chicago-based taxicab affiliation from 1996 until 2016, when it dissolved. Compl. ¶ 2, ECF No. 1. It had over 1,600 members who paid it dues pursuant to affiliation agreements. Id. ¶¶ 4–5. Yellow Group, which owned YCA, owned and licensed to YCA the design mark YCA used on its vehicles. Id. ¶¶ 6–7, 99, 159–60. Levine, Corrigan, Sakata, and Tessler ("YCA's officers and directors") were officers and directors of YCA. Id. ¶¶ 35–37, 39, 101–02. Levine was the majority owner of People Mover, which held a majority interest in Yellow Group. Id. ¶ 35. The other 45% of Yellow Group was owned by Yellow Cab Partners, an entity wholly owned by Corrigan. Id. ¶ 36. Levine and Corrigan also owned or managed YMH, CLMH, and TMM. Id. ¶¶ 44–46.

YCA passenger Marc Jacobs was injured while riding in a taxicab in 2005. Id. ¶¶ 8, 55–56. Jacobs filed suit in September 2005 against the driver of the vehicle, as well as the owner of the vehicle who was a YCA member, and YCA was later added as a defendant. Id. ¶ 8.² Around this time, YCA's officers and directors became aware of the lawsuit and YCA's potential liability. Id. ¶¶ 9, 59, 66.

According to the Complaint, in order to prevent creditors from reaching YCA's assets, YCA's officers and directors established TAS in 2006, and Defendant John Moberg became TAS's president. Id. ¶¶ 10, 38, 57, 59–60, 66. Defendants then engaged in a series of transactions to defraud YCA's creditors and prevent YCA from being able to satisfy a possible future judgment against it in the Jacobs lawsuit. Id. ¶¶ 9–15, 56–66, 203–13. For example, YCA paid TAS approximately $6 million per year pursuant to an unfavorable services agreement that had not been negotiated at arms' length. Id. ¶¶ 10, 12, 69–74, 82. TAS continued to charge and collect these fees from YCA despite a decrease in the scope of services it provided, and YCA's officers and directors did not attempt to renegotiate the agreement. Id. ¶¶ 82–86.

In addition, TAS collected and retained all payments from YCA members pursuant to their affiliation agreements with YCA. Id. ¶¶ 11, 57, 79. TAS then transferred portions of that revenue, disguised as "management fees" and "referral fees," to YCA's officers and directors, Moberg, and affiliated companies, including TMM. Id. ¶¶ 57–58, 62, 64, 87–97, 110–11, 120–26. While YCA was still operating, YCA's officers and directors failed to keep accurate records and commingled YCA and TAS funds. Id. ¶¶ 187–202. Using YCA revenue that had been transferred to them, Levine and Corrigan purchased and sold taxicab medallions, but failed to distribute any of the profit to YCA. Id. ¶¶ 16–20, 175–86. As a result, YCA was insolvent and unable to pay its creditors from 2006 through 2016. Id. ¶¶ 14–15, 61.

Jacobs obtained a $26 million judgment against YCA in 2015. Id. ¶ 21. YCA then filed for Chapter 11 bankruptcy, which was converted to a Chapter 7 bankruptcy on November 3, 2016. Id. ¶¶ 21, 24, 53, 127. TAS informed YCA on November 15, 2016, that it would no longer provide services to YCA. Id. ¶¶ 26, 138. This forced YCA to cease business operations almost immediately. Id. ¶¶ 30, 136, 141.

On November 17, 2016, certain Defendants formed a new taxicab affiliation, Yellow Cab Association, Inc. ("New YCA"), to solicit members away from YCA. Id. ¶¶ 28, 129–30, 132, 145, 151–52. New YCA is wholly owned by Moberg. Id. ¶¶ 38, 150. After its formation, New YCA used mobile data terminals and other taxicab equipment that belonged to YCA. Id. ¶¶ 153–57. In addition, New YCA used the same color scheme and design mark that YCA had used, merely replacing "Affiliation" with "Association." Id. ¶¶ 29, 166, 168. This tricked customers into believing that New YCA and YCA were one and the same. Id. ¶¶ 158–74.

Based on these events, the Trustee brings the following claims: breach of fiduciary duty (Count I); tortious interference with contractual relations (Count II); tortious interference with prospective business advantage (Count III); violations of the Illinois Uniform Fraudulent Transfer Act ("UFTA"), 740 Ill. Comp. Stat. 160/5 and 160/6 (Counts IV through IX); recovery of avoided transfers under 11 U.S.C. § 550 (Count X); conversion (Counts XI and XII); false advertising in violation of the Lanham Act (Count XIII); unfair competition under Illinois common law (Count XIV); violation of the Illinois Uniform Deceptive Trade Practices Act ("UDTPA"), 815 Ill. Comp. Stat. 510/2 (Count XV); and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA"), 815 Ill. Comp. Stat. 505/2 (Count XVI). Defendants have moved to dismiss each of the claims.

Legal Standard

To survive a motion to dismiss under Rule 12(b)(6), a complaint must "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In addition, when considering motions to dismiss, the Court accepts "all well-pleaded factual allegations as true and view[s] them in the light most favorable to the plaintiff." Lavalais v. Vill. of Melrose Park , 734 F.3d 629, 632 (7th Cir. 2013). At the same time, "allegations in the form of legal conclusions are insufficient to survive a Rule 12(b)(6) motion." McReynolds v. Merrill Lynch & Co., Inc. , 694 F.3d 873, 885 (7th Cir. 2012) (citing Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 ). As such, "[t]hreadbare recitals of the elements of the cause of action, supported by mere conclusory statements, do not suffice." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.

Moreover, allegations of fraud must be pleaded in conformance with Rule 9(b). Borsellino v. Goldman Sachs Grp., Inc. , 477 F.3d 502, 507 (7th Cir. 2007). Under Rule 9(b), in "averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Id. Such circumstances include the identity of the person who committed the fraud, the time, place, and content of the fraud, and the method by which the fraud was communicated. See Vicom, Inc. v. Harbridge Merch. Servs., Inc. , 20 F.3d 771, 777 (7th Cir. 1994). This is also known as the "who, what, when, where and how" standard. DiLeo v. Ernst & Young , 901 F.2d 624, 627 (7th Cir. 1990). This requirement ensures that defendants have fair notice of a plaintiff's claims, providing an opportunity to frame their answers and defenses. Reshal Assocs., Inc. v. Long Grove Trading Co. , 754 F.Supp. 1226, 1230 (N.D. Ill. 1990).

Analysis

Defendants move to dismiss all claims under Rule 12(b)(6) and move for sanctions under Rule 11. Defendants argue that the Trustee's claims should be dismissed because they fail to meet the heightened pleading standard of Rule 9(b). The Trustee disagrees, noting that none of the sixteen counts is based in fraud. Defendants also argue that the Trustee's claims are barred by the statutes of limitations and are precluded by prior bankruptcy proceedings. The Trustee, in turn, contends that the claims are not time-barred because tolling may apply and that the bankruptcy judge's findings have no preclusive effect.

I. Statutes of Limitations

First, Defendants seek dismissal of all the Trustee's claims based on the applicable statutes of...